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What is a cryptocurrency and how does it work? A beginner’s guide

Cryptocurrency is a digital asset that can be transferred, stored, and traded between virtual wallets. 

The word ‘crypto’ comes from the Greek word ‘kruptos’, meaning ‘hidden’. It’s also used in the word ‘cryptography’: the science of encoding/decoding information or data so that it is illegible to anyone other than the intended viewer. The second part of the term ‘cryptocurrency’, ‘currency’, stems from the fact that Cryptocurrencies provide a medium of exchange. 

Cryptocurrencies use a new case of technology, called blockchain, to secure the network. This network consists of computers all around the world that work together to process and validate transactions, which are then recorded on blockchain.

Blockchains

Blockchains are databases, or ledgers, that store blocks of data. The data on each block consists of a record of all transactions that occur on the network over a period of time. These blocks are continually created and ‘chained’ together using cryptographic methods. 

Once a block is created and added to the blockchain, it cannot be changed without changing all subsequent blocks around it. 

Blockchains are completely decentralised, immutable, censorship resistant, and permissionless – they are not controlled or managed by any one, single entity. Anyone can create a wallet and use the blockchain immediately. 

All data stored on blockchain is public; anyone and everyone can view all the past transactions that have occurred, making it fraud resistant. Unless known for a fact that the wallet is owned by a certain individual or entity, the transactions are anonymous to outside viewers 

Examples of cryptocurrencies 

Bitcoin - the first cryptocurrency, created in 2009 by a mysterious figure called Satoshi Nakamoto.

Ether -  the cryptocurrency of the Ethereum network; a programmable blockchain launched in 2015 that supports smart contracts (conditional transactions). 

Dogecoin - a ‘meme-coin’ created as a sort of joke by a couple of IBM engineers back in 2013, that has since gained traction with the likes of Elon Musk tweeting his support.

Blockchain technology has developed leaps and bounds since its inception. Brand new ideas such as decentralised finance, or DeFi, are growing massively in popularity. Bitcoin is even accepted as legal tender in El Salvador.

Cryptocurrencies are attractive to many because they offer true control over your wealth. They allow for the removal of the middleman when transferring wealth, making payments, and creating/executing complex financial agreements.